gold and silver project

8/18/2019 Gold and Silver Project

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INTRODUCTION

In the modern world, all the activities are concerned with the economic activities and

very particular to earning profit through any venture or activities. The entire business activities

are directly related with making profit. (According to the economics concept of factors of

production, rent given to landlord, wage given to labor interest given to capital and profit given

to share holders or proprietors), a business concern needs finance to meet all the requirements.

ence finance may be called as capital, investment, fund etc.., but each term is having different

meanings and unique characters .Increasing the profit is the main aim of any kind of economic

activity.

NATURE OF FINANCIAL MANAGEMENT:

!inancial "anagement is that managerial activity which is concerned with the planning

and controlling of the firm#s financial resources. As a separate activity or discipline it is of

recent origin it was a branch of economics till $%&'. till today it has no unique body of

knowledge of its own, and it draws heavily on economics for its theoretical concepts.

DEFINITION:

The subects of financial management are of immerse interest to both academicians and

practicing managers. It is of great interest to academicians because the subect is still

developing, and there are still certain areas where controversies e*ist for which no unanimous

solutions have been reaching as yet. +racticing managers are interested in this subect because

among the most crucial decisions of the firm#s are those which relate to finance and an

understanding of the theory of financial management provides them with conceptual and

analytical insights to make those decisions skillfully.

SCOPE OF FINANCE FUNCTIONS

Three most important activities of a business firm are

$ !inance

- +roduction

"arketing.

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The firm secures capital it needs and employs it in activities, which generate returns on

invested capital. A business firm thus is an entity that engages in activities to perform the

functions of finance, production and marketing.

The raising of capital funds and using them for generating returns and paying returns to

the suppliers of funds is called the finance function of the firm. The main functions of the

financial managers are to plan for analy/ing and utili/ing funds to make the ma*imum

contribution for the operation of the organi/ation.

It reali/es knowledge of the financial market from which the funds are drawn. It

reali/es knowledge of how to make sound investment decisions and to simulate efficient

operations in the organi/ation.

A large number of alternative choices involved in financial decisions. The choices

include the use of internal resources, e*ternal funds, 0ong1term funds a higher rate of growth

or lower rate of growth and soon.

FUNCTIONS OF FINANCE

$. Investment 2ecision

-. 3orking 4apital "anagement

. !inancing 2ecision

5. 2ividend +olicy 2ecision

THE CHANGING ROLE OF FINANCIAL MANAGEMENT

As with many things in the contemporary world financial management has undergone

significant changes over the years. The financial management had a very limited role in a business

enterprise. !inance manager is responsible only for maintaining financial records, preparing

reports of the company#s status, performance and arranging funds recorded by the company so that

it would meet its obligation in time.

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The financial manager as a matter of fact, was regarded as a speciali/ed staff officer in

the company concerned only with administering sources of funds. e was called upon only when

the company e*perienced the problem of shortage of funds. The management relates the financial

manager to locate suitable continued in recent years.

!irst there was been increased belief that source of capital produce requires accurate

measurements of the cost of capital. econdly capital has been in short supply the old interest in

the ways of raising funds.

Third, there has been a continued activity that has led to revealed interest in takeovers.

!ourth accelerated progress in transportation and communication has brought the countries of the

world close together. They in turn have stimulated interest in the international finance. !inding the

firm#s appropriate role in efforts they solve these problems, demanding on increasing proportion of

these items of financial managers.

The financial system is possibly the most important institutional and functional vehicle

for economic transformation. !inance is a bridge between the present and the future and whether

the mobili/ation of savings or their efficient, effective and equitable allocation for investment, it

the access with which the financial system performs its functions that sets the pace for the

achievement of broader national obectives.

According to 4hristy, the obective of the financial system is to 6supply funds to various

sectors and activities of the economy in ways that promote the fullest possible utili/ation of

resources without the destabili/ing consequence of price level changes or unnecessary

interference with individual desires.7

According to 8obinson, the primary function of the system is 6to provide a link between

savings and investment for the creation of new wealth and to permit portfolio adustment in the

composition of the e*isting wealth.


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A financial system or financial sector functions as an intermediary and facilitates the flow

of funds from the areas of surplus to the deficit. It is a composition of various institutions,

markets, regulations and laws, practices, money manager analyst, transactions and claims and

liabilities.

The word 9system# implies a set of comple* and interrelated factors organi/ed in a

particular form. These factors are mostly interdependent but not always mutually e*clusive. The

financial system of any country consists of several ingredients. It includes financial institutions,

markets, financial instruments, services, transactions, agents, claims and liabilities in the

economy.

9!inancial system# is a system to canali/e the funds from the surplus units to the deficit

units. 92eficit units# is a case where current e*penditure e*ceeds their current income. There are

other entities whose current income e*ceeds current e*penditure which is called as 9urplus

:nits#. An efficient financial system not only encourages savings and investments, it also

efficiently allocates resources in different investment avenues and thus accelerates the rate of

economic development.

The financial system of a country plays a crucial role of allocating scarce capital

resources to productive uses. Its efficient functioning is of critical importance to the economy. It

is a system for the efficient management and creation of finance. The economic development of

a nation is reflected by the progress of the various economic units, broadly classified into

corporate sector, government and household sector. 3hile performing their activities these units

will be placed in a surplus;deficit;balanced budgetary situations.

Definitions

6According to 8obinson, financial system provides a link between savings and

Investment for the creation of new wealth and to permit portfolio adustment in the position of

the e*isting wealth.7

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6According to


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COMMODIT* TRADING

+Co!!o"it T#a"in,- is characteri/ed by high market volatility and risk. ?lobali/ation

and advances in technology have significantly changed the way trading is done the factors

differencing prices and the frequency with which prices change has increased e*ponentially

timely access to information and analysis is the only way to succeed in commodity. 4ommodities

actually offer immense potential to become a separate asset class for market survey investors,

arbitrageurs and speculators.

8etail investors, who claim to understand the equity markets, may find commodities an

unfathomable market. ut commodities are easy to understand as far as fundamentals of demand

and supply are concerned. 8etail investors should understand the risks and advantages of trading

in commodities futures before taking a leap. istorically, pricing in commodities futures has

been less volatile compared with equity and bonds, thus providing an efficient portfolio

diversification option.

The primary obective of the proect is to understand and know the concepts and

mechanism of commodity trading with special reference to ?old B ilver. The obective was

also to know and analy/e the growth of commodity trading in India and find out the factors that

affect the trading of gold and silver commodities.

This proect has been undertaken to give an outlook on the potential growth of

commodities trading in India. The proect also aims to study the commodity trading and it#s

clearing B settlementC analy/e the factors that influence the prices of gold and silverC study the

commodity trading with reference to gold and silver and analy/e the gold and silver trend in

commodity market.

A commodity market is a market that trades in primary rather than manufactured

products. oft 4ommodities are agricultural products such as wheat, coffee cocoa and sugar hard

commodities are mined, such as (gold, rubber and oil).

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http://en.wikipedia.org/wiki/Goldhttp://en.wikipedia.org/wiki/Rubberhttp://en.wikipedia.org/wiki/Rubberhttp://en.wikipedia.org/wiki/Oilhttp://en.wikipedia.org/wiki/Rubberhttp://en.wikipedia.org/wiki/Oilhttp://en.wikipedia.org/wiki/Gold


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Investors access about @' maor commodity markets worldwide with purely financial

transactions increasingly outnumbering physical trades in which goods are delivered. !utures

contracts are the oldest way of investing in commodities.

!utures are secured by physical assets. 4ommodity markets can include physical trading

and derivatives trading using spot prices, forwards, futures, and options on futures. !armers have

used a simple form of derivative trading in the commodity market for centuries for price risk

management.

A financial derivative is a financial instrument whose value is derived from a commodity

termed as underlying. 2erivatives are either e*change1traded or over1the1counter (ET4). An

increasing number of derivatives are traded via clearing houses some with 4entral 4ounterparty

4learing, which provide clearing and settlement services on a futures e*change, as well as off1

e*change in the ET4 market.

2erivatives such as futures contracts, waps ($&F's1), >*change1traded 4ommodities

(>T4) (-''), forward contracts have become the primary trading instruments in commodity

markets. !utures are traded on regulated commodities e*changes. Ever1the1counter (ET4)

contracts are Gprivately negotiated bilateral contracts entered into between the contracting parties

directlyG.

>*change1traded funds (>T!s) began to feature commodities in -''. ?old >T!s are

based on Gelectronic goldG that does not entail the ownership of physical bullion, with its added

costs of insurance and storage in repositories such as the 0ondon bullion market. According to

the 3orld ?old 4ouncil, >T!s allow investors to be e*posed to the gold market without the risk

of price volatility associated with gold as a physical commodity.

2omestic production being minuscule practically the entire demand is met by imports

and recycling of previously accumulated stock and scrap generated from it. There was a big spurt

in the consumption following the 0iberali/ation of gold imports in $&&-.

F

http://en.wikipedia.org/wiki/Futures_contractshttp://en.wikipedia.org/wiki/Futures_contractshttp://en.wikipedia.org/wiki/Futures_contractshttp://en.wikipedia.org/wiki/Spot_pricehttp://en.wikipedia.org/wiki/Forward_contracthttp://en.wikipedia.org/wiki/Forward_contracthttp://en.wikipedia.org/wiki/Futures_contracthttp://en.wikipedia.org/wiki/Futures_contracthttp://en.wikipedia.org/wiki/Option_(finance)http://en.wikipedia.org/wiki/Option_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Exchange-traded_derivative_contracthttp://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Clearing_house_(finance)http://en.wikipedia.org/wiki/Clearing_house_(finance)http://en.wikipedia.org/wiki/Central_Counterparty_Clearinghttp://en.wikipedia.org/wiki/Central_Counterparty_Clearinghttp://en.wikipedia.org/wiki/Central_Counterparty_Clearinghttp://en.wikipedia.org/wiki/Swap_(finance)http://en.wikipedia.org/wiki/Commodities_exchangehttp://en.wikipedia.org/wiki/Exchange-traded_fundhttp://en.wikipedia.org/wiki/London_bullion_markethttp://en.wikipedia.org/wiki/World_Gold_Councilhttp://en.wikipedia.org/wiki/Volatility_(finance)http://en.wikipedia.org/wiki/Futures_contractshttp://en.wikipedia.org/wiki/Futures_contractshttp://en.wikipedia.org/wiki/Spot_pricehttp://en.wikipedia.org/wiki/Forward_contracthttp://en.wikipedia.org/wiki/Futures_contracthttp://en.wikipedia.org/wiki/Option_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Exchange-traded_derivative_contracthttp://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Clearing_house_(finance)http://en.wikipedia.org/wiki/Central_Counterparty_Clearinghttp://en.wikipedia.org/wiki/Central_Counterparty_Clearinghttp://en.wikipedia.org/wiki/Swap_(finance)http://en.wikipedia.org/wiki/Commodities_exchangehttp://en.wikipedia.org/wiki/Exchange-traded_fundhttp://en.wikipedia.org/wiki/London_bullion_markethttp://en.wikipedia.org/wiki/World_Gold_Councilhttp://en.wikipedia.org/wiki/Volatility_(finance)


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4onsumption seems to remain around 5''15-@ tons in the ne*t couple of years. efore

resuming the rising trend, estimated consumption was more than twice the level recorded in $&&'

and nearly F'H higher than in $&&-.

A maor step in the development of gold markets in India was the authori/ation in uly

$&&F by the 8I to commercial banks to import gold for sale or loan to ewelers and e*porters.

Initially, seven banks were selected for this purpose on the basis of certain specified criteria like

minimum capital adequacy, profitability, risk management e*pertise, previous e*perience in this

area, etc. 3orld demand for gold was about -'' tons in -''%. 4orresponding to that in India

was about %5- tons with imports occupying maor chunk of D@' tons, domestic production - tons

and remaining being recycled gold.

!or the purpose of study, both primary and secondary data has been collected. The

observational method and survey research method is used to collect the primary data. The main

research instruments used the required data is a well1structured questionnaire. A detailed

questionnaire has been prepared to reflect the opinions on the commodity trading in India and the

customers# opinion towards investment patterns in commodities market.

Additional margin In case of sudden higher than e*pected volatility, the e*change calls

for an additional margin, this is a preemptive move to prevent breakdown. This is imposed when

the e*change fears that the markets have become too volatile and may result in some payments

crisis, etc.,

"ark1to1"arket margin ("T") At the end of each trading day, the margin account is

adusted to reflect the trader#s gain or loss. This is known as marking to market the account of

each trader. All futures contracts are settled daily reducing the credit e*posure to one day#s

movement. ased on the settlement price, the value of all positions is marked1to1market each day

after the official close, i.e., the accounts are either debited or credited based on how well the

positions fared in that day#s trading session.

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If the account falls below the maintenance margin level the trader needs to replenish the

account by giving additional funds. En the other hand, if the position generates a gain, the funds

can be withdrawn (those funds above the required initial margin) or can be used to fund

additional trades.

!le*ibility, certainty and transparency in purchasing commodities facilitate bank

financing. +redictability in prices of commodity would lead to stability, which in turn would

eliminate the risks associated with running the business of trading commodities. This would

make funding easier and less stringent for banks to commodity market players.

The era of liberali/ation has revolutioni/ed the commodity market. In such a scenario it is

necessary to make an assessment of commodity market as more and more investors are seeking

commodity market as of the important investment avenues, it is necessary to make a detailed

analysis. uch an analysis will help any person who is to invest in commodity market.

The need of the study arises due to lack of knowledge about the commodity market

because now1a1days, commodity trading has become an important investment avenue and most

of the investors are still unaware about its advantages and shortcomings. uge amount of

investment is required for trading in commodity market. To know the impact of other markets on

commodity market, it became necessary to understand the trading of commodity market.

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NEED FOR THE STUD*

$) The need of the study arises due to lack of knowledge about the commodity market

because now1a1days, commodity trading has become an important investment avenue andmost of the investors are still unaware about its advantages and shortcomings.

-) uge amount of investment is required for trading in commodity market.

) It helps in the allocation of surplus funds in hand among a variety of financial assets open

for investment.

5) In the stock e*changes we can know the total information regarding the companies buying and the selling activities.

@) The purpose of the study is to known about stock markets in India, how they work,

fundamental requirements before entering the stock market, how to enter the stock

market design, stock selection, when to buy or sell a commodity , how to invest and

knowing about market intermediaries.

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The "ain obective of the proect is to understand and know the concepts and mechanism

of commodity trading with special reference to ?old B ilver. The obective was also to know

and analy/e the growth of commodity trading in India and find out the factors that affect the

trading of gold and silver commodities.

This proect has been undertaken to give an outlook on the potential growth of

commodities trading in India.

$) To understand the concept of commodity trading in India

-) To study the commodity trading and its clearing B settlement.

) To analyses the factors that influence the prices of gold and silver.

5) To study the commodity trading with reference to gold and silver.

@) To analy/e the gold and silver trend in commodity market.

D) To suggest potential investors on commodity trading in gold and silver.

F) edging with the obective of transferring risk related to the possession of physical assets

through any adverse moments in price. 0iquidity and +rice discovery to ensure base

minimum volume in trading of a commodity through market information and demand

supply factors that facilitates a regular and authentic price discovery mechanism.

%) "aintaining buffer stock and better allocation of resources as it augments reduction in

inventory requirement and thus the e*posure to risks related with price fluctuation

declines. 8esources can thus be diversified for investments.

&) +rice stabili/ation along with balancing demand and supply position. !utures trading

leads to predictability in assessing the domestic prices, which maintains stability, thus

safeguarding against any short term adverse price movements. 0iquidity in 4ontracts of

the commodities traded also ensures in maintaining the equilibrium between demand and

supply. !le*ibility, certainty and transparency in purchasing commodities facilitate bank

financing.

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METHODOLOG* OF THE STUD*:

8esearch is a procedure of logical and systematic application of the fundamentals of

science to the general and overall questions of a study and scientific technique by which provide

precise tolls, specific procedures and technical, rather than philosophical means for getting and

ordering the data prior to their logical analysis and manipulation.

2ifferent type of research designs is available depending upon the nature of research

proect, availability of able manpower and circumstances. The study about 6Trends and future of

derivatives in India7 is descriptive in nature. o survey method is used for study.

Sa!1lin, P#oce"u#e:

The small representative selected out of large population is selected at random is called

sample. 3ell1selected sample may reflect fairly, accurately the characteristic of population. The

chief of sampling is to make an IJT>8+8>TATIEJ about unknown parameters from a

measurable sample statistics. The statistical hypothesis relating population.

Sou#ces of Data:

The sources of data include both primary sources and secondary data sources.

P#i!a# Data:

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The primary data was collected through observation, personal interview and observation

methods.

Secon"a# Data:

The secondary data was collected from ournals, "aga/ines and +roect reports,

"anagement ooks, "anagement ournals, +ublications and Internet.

The secondary data include material collected from

Jewspapers

"aga/ine

Data collection inst#u!ents:

The various methods of data gathering involve the use of appropriate recording forms.

These are called tools or instruments of data collection.

4ollection Instruments

$. Ebservation

-. Interview guide

. Interview schedule

>ach tool is used for specific method of data gathering. The tool for data collection

translates research obectives into specific term;questions to response, which will provide

research obective.

The instrument data collection in our study interview schedule mainly. >very respondent

was conducted personally with an interview.

chedule contains questionsC Interview method was used because it can be e*plained

more easily and clearly and takes less time to answer.

Assu!1tions:

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i. The suggestion is based on the study on !undamental and Technical Analysis is

such as price movement, 8elationship of gold with other factor, very market transaction consists of three components = trading, clearing and settlement.

TRADING

The trading system on the 4ommodities e*change provides a fully automated screen1

based trading for futures on commodities on a nationwide basis as well as an online monitoring

and surveillance mechanism. It supports an order driven market and provides complete

transparency of trading operations. After hours trading has also been proposed for

implementation at a later stage.

The J42>K system supports an order driven market, where orders match automatically.

Erder matching is essentially on the basis of commodity, its price, time and quantity. All

quantity fields are in units and price in rupees. The e*change specifies the unit of trading and the

delivery unit for futures contracts on various commodities. The e*change notifies the regular lot

si/e and tick si/e for each of the contracts traded from time to time. 3hen any order enters the

trading system, it is an active order. It tries to find a match on the other side of the book. If it

finds a match, a trade is generated. If it does not find a match, the order becomes passive and

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gets queued in the respective outstanding order book in the systemC Time stamping is done for

each trade and provides the possibility for a complete audit trail if required.

COMMODIT* FUTURES TRADING C*CLE

J42>K trades commodity futures contracts having one1month, two1month and three1

month e*piry cycles. All contracts e*pire on the -'th of the e*piry month. Thus a anuary

e*piration contract would e*pire on the -' th of anuary and a !ebruary e*piry contract would

cease trading on the -'th !ebruary. If the -'th of the e*piry month is a trading holiday, the

contracts shall e*pire on the previous trading day. Jew contracts will be introduced on the

trading day following the e*piry of the near month contract.

!ollowing !igure shows the contract cycle for futures contracts on J42>K.

an !eb "ar Apr

Time

an -' contract

!eb -' contract

"arch -' contract

April -' contract

"ay -' contract

une -' contract

ORDER T*PES AND TRADING PARAMETERS

An electronic trading system allows the trading members to enter orders with various

conditions attached to them as per their requirement. These conditions are broadly divided into

the following categories

Time conditions

+rice conditions

Ether conditions

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everal combinations of the above are possible thereby providing enormous fle*ibility to

users. The order types and conditions are summari/ed below. Ef these, the order types available

on the J42>K system are regular lot order, stop loss order, immediate or cancel order, good till

day order, good till cancelled order, good till order and spread order.

TIME CONDITIONS

45 Goo" till "a o#"e#:

A day order, as the name suggests is an order which is valid for the day on which it is

entered. If the order is not e*ecuted during the day, the system cancels the order automatically at

the end of the day >*ample A trader wants to go long on "arch $, -''5 in refined palm oil on

the commodity e*change. A day order is placed at 8s.5';1 $' kg. If the market does not reach

this price the order does not get filled even if the market touches 8s.5$ and closes.

In other words day order is for a specific price and if the order does not get filled that day,

one has to place the order gain the ne*t day.

65 Goo" till cancelle" 7GTC8:

A ?T4 order remains in the system until the user cancels it. 4onsequently, it spans

trading days, if not traded on the day the order is entered. The ma*imum number of days an

order can remain in the system is notified by the e*change from time to time after which the

order is automatically cancelled by the system. >ach day counted is a calendar day inclusive of

holidays. The days counted are inclusive of the day on which the order is placed and the order is

cancelled from the system at the end of the day of the e*piry period. >*ample A trader wants to

go long on refined palm oil when the market touches 8s.5'';1 $' kg. Theoretically, the order

e*ists until it is filled up, even if it takes months for it to happen. The ?T4 order on the J42>K

is cancelled at the end of a period of seven calendar days from the date of entering an order or

when the contract e*pires, whichever is earlier.

95 Goo" till "ate 7GTD8

A ?T2 order allows the user to specify the date till which the order should remain in the

system if not e*ecuted. The ma*imum days allowed by the system are the same as in ?T4 order.

At the end this day ; date, the order is cancelled from the system. >ach day ; date counted is

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inclusive of the day ; date on which the order is placed and the order is cancelled from the

system at the end of the day ; date of the e*piry period.

5 I!!e"iate o# Cancel 7IOC8

An IE4 order allows the user to buy or sell a contract as soon as the order is released into

the system, failing which the order is cancelled from the system. +artial match is possible for the

order, and the unmatched portions of the order are cancelled immediately.

;5 All o# none o#"e#

All or none order (AEJ) is a limit order, which is to be e*ecuted in its entirety, or not at

all. :nlike a fill1or1kill order, an all1or1none order is not cancelled if it is not e*ecuted as soon as

it is represented in the e*change. An all1or1none order position can be closed out with another

AEJ order.


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wants to sell or go short . The order gets filled at the suggested stop order price or at a better

price. >*ample A trader has purchased crude oil futures at 8s.F@' per barrel.

e wishes to limit his loss to 8s.@' a barrel. A stop order would then be placed to sell

an offsetting contract if the price falls to 8s.F'' per barrel. 3hen the market touches this price,

stop order gets e*ecuted and the trader would e*it the market. !or the stop1loss sell order, the

trigger price has to be greater than the limit price.

OTHER CONDITIONS

"argin is the deposit money that needs to be paid to buy or sell each contract. The margin

required for a futures contract. The margin required for a futures contract is better described as

performance bond or good faith money. The margin levels are set by the e*changes based on

volatility (market conditions) and can be changed at any time.

The margin requirements for most futures contracts range from -H to $@H of the value of

the contract. In the futures market, there are different types of margins that a trader has to

maintain. 3e will discuss them in more details when we talk about risk management in the ne*t

chapter. At this stage we look at the types of margins as they apply on most futures e*changes.

$) Initial !a#,in: The amount that must be deposited by a customer at the time of entering

into a contract is called initial margin. This margin is meant to cover the largest potential

loss in one day. The margin is a mandatory requirement of parties who are entering into

the contract.

-) Maintenance !a#,in: A trader is entitled to withdraw any balance in the margin account

in e*cess of the initial margin. To ensure that the balance in the margin account never

becomes negative, a maintenance margin, which is somewhat lower than the initial

margin, is set. If the balance in the margin account falls below the maintenance margin,

the trader receives a margin call and is requested to deposit e*tra funds to bring it to the

initial margin level within a very short period of time. The e*tra funds deposited are

known as a variation margin. If the trader does not provide the variation margin, the

broker closes out the position by offsetting the contract.

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) A""itional !a#,in: In case of sudden higher than e*pected volatility, the e*change calls

for an additional margin, this is a preemptive move to prevent breakdown. This is

imposed when the e*change fears that the markets have become too volatile and may

result in some payments crisis, etc.,

8 Ma#>=to=Ma#>et !a#,in 7MTM8: At the end of each trading day, the margin account is

adusted to reflect the trader#s gain or loss. This is known as marking to market the

account of each trader. All futures contracts are settled daily reducing the credit e*posure

to one day#s movement.

;8 ased on the settlement price, the value of all positions is marked1to1market each day

after the official close, i.e., the accounts are either debited or credited based on how well

the positions fared in that day#s trading session. If the account falls below the

maintenance margin level the trader needs to replenish the account by giving additional

funds.

ust as a trader is required to maintain a margin account with a breaker, a clearing

house member is required to maintain a margin account with the clearing house. This is

known as clearing margin. In the case of clearing house member, there is only an original

margin and no maintenance margin. 4learing house and clearing house margins have

been discussed further in detail under the chapter on clearing and settlement.

CHARGES

"embers are liable to pay transaction charges for the trade done through the e*change

during the previous month. The important provisions are listed belowC the billing for the all

trades done during the previous month will be raised in the succeeding month.

$. 8ate of charges The transaction charges are payable at the rate of 8s.D per 8s. Ene 0akh

trade done. This rate is subect to change from time to time.

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COMPAN* PROFILE

Jirmal ang ?roup is one of the largest retail broking houses in India, providing the investors

state of art services in capital markets in the country. They are a financial services company in

India, offering a wide range of financial products and services targeted at retail investors, high

net worth individuals and corporate and institutional clients. The ?roup has memberships of

ombay tock >*change 0imited, Jational tock >*change of India 0imited, "ulti 4ommodity

>*change of India 0imited, Jational 4ommodity and 2erivatives >*change limited and is also a

2epository participant of J20 and 42 (I) 0, the 2epositories of the country.

+eople are our greatest asset. 2rawn from a diversity of professional backgrounds, their

blend of e*perience, skill and dedication is shared with all our clients.

3e emphasi/e adequate, thorough research local and world1wide developments,

balancing these with the astute discovery of intrinsic values, synergies and growth.

imply to help you ma*imi/e your returns. Lour interests no matter how big or small 1 come

first. 4omprehensive and available to meet every investment financial need.

To provide service, par e*cellence and become your spirit of change.

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Sc#i1%s: !unding only against approved securities as per the list approved by the management

from time to time.

.enefits

4orporate Action benefits like bonus, dividend etc continues to accrue to the borrower.

Any appreciation in the value of the ecurities given as margin would automatically

allow enhancement in drawing power.

Interest will be calculated on the amount utili/ed B the actual period for which it is

utili/ed.

4lients can view their financial statement and holdings online.

8isk "onitoring ystem In case of shortfall in the margin the client has to follow the

prescribed norms and replenish the short margin or else the shares would be liquidated to the

e*tent of the shortfall.

Docu!ents Re?ui#e!ent

A) In"i)i"uals

$. 4lient has to open a bank account with A*is ank and 2emat account with Jirmal ang

ecurities +vt 0td both under +EA with us.

-. 0oan agreement to be duly filled up and signed therein.

. 4opy of +AJ card

5. 4opy of Address +roof

@. Two passport si/ed photographs

D. 4opy of latest two years IT8s

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F. Two +ost dated cheques , one for principal B other for interest in the name of Jirmal

ang !inancial ervices +vt 0td

%. 4heque of 8s D'' towards the loan documentation charges

&. 4heque of 8s D''';1 in favour of A*is bank for maintaining minimum balance, this

cheque will be credited in client#s A*is bank a;c only

) 4ompany all documents as mentioned in point no $ to % in case of individual are required.

Additional documents to be collected are

$. 4opy of annual report of last two years

-. "emorandum and article of association

. 0ist of directors

5. Two photographs of all the directors.

@. oard resolution on letter head of the company.

D. 4heque of 8s $$''';1 in favour of A*is bank for maintaining minimum balance, thischeque will be credited in client#s A*is bank a;c only.

3in"l note

All documents should be self attested

All +hotographs and signatures should match with the proof given

Additional documents need to be submitted in case of any discrepancy is noticed.

+ortfolio "anagement ervices (+")14ultivating a taste for success Investing is no longer a

means to save the e*tra income earned, but has become an essential ingredient of high living.

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+", as a product category, is designed to help clients navigate the increasingly tough and

uncertain terrain of the investment world with total ease and equanimity. 4oncentrated calls

taken by professionals, who have the e*perience of negotiating a number of market cycles over

the years, help investors both defend their investments;savings and consistently perform better

than the markets. Thus, Jirmal ang +" offers the vehicles for a comfortable and smooth

ourney to wealth creation in the investment arena.

3e have plans for a range of products, occupying various positions along the risk1return

matri*, thus catering to the needs of clients with different approaches to investing. In

continuation with the tradition of delivering quality with sincerity at Jirmal ang, these marks

yet another step towards becoming a complete financial solution provide

Investing in the stock market requires in1depth analysis of the scrip and the companies

and the business that they are involved in. 8etail investors seldom have the time and e*pertise to

analy/e stocks.

In India, "utual funds come to the rescue of such investors. All wary investors know that

the best way to make money is to involve in stock market investing and buying Indian mutual

funds.

"utual !unds in India comprise of a group of investors come together and create a

corpus which in invested in the stock market by a fund manager. Thus, the investors can depend

on the e*pertise of the fund manager in order to ma*imi/e the returns on their mutual fund

portfolio.

In India, "utual !unds invest in different securities subect to the investment obective as

set forth in the prospectus. The prospectus is a legal document under >I laws and contains a

lot of information about the mutual fund.

Investing in mutual funds in India has many benefits

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The e*pertise of the fund manager of the A"4 that manages mutual funds money in

India helps the investor to ma*imi/e the profits on the amount invested in the mutual

fund.

Indian "utual !unds invest money in a widespread basket of shares and equities,

depending on the nature of the !und and switch investments to different securities

depending on the >quity market conditions

In India, "utual funds are an easy and cost efficient way of investing along with ta*

benefits.

There are many kinds of mutual funds available for the investors to choose from.

ector pecific "utual !und

0arge;mall;"id = cap "utual !und

Inde* "utual !unds

ere is some information on companies that would enable you to invest in some of the best

mutual funds in India

I "utual !und

!ranklin Templeton "utual !und

8eliance "utual !und

Tata "utual !und

undaram J+ +aribas "utual !und

!idelity Investments "utual !und

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Ou# 1#inci1al ,#ou1 co!1anies a#e:

48 Ni#!al .an, Secu#ities P#i)ate Li!ite"

Me!'e#1 Jational tock >*change of India 0imited

Me!'e#1 ombay tock >*change 0imited

Pa#tici1ant= Jational ecurities 2epository 0imited

Pa#tici1ant= 4entral 2epository ervices (India) 0imited

68 Ni#!al .an, Co!!o"ities P#i)ate Li!ite"

Me!'e#= "ulti 4ommodity >*change of India 0imited

Me!'e#= Jational 4ommodity B 2erivatives >*change 0td

98 .an, E?uit .#o>in, P#i)ate Li!ite"

Me!'e#1 ombay tock >*change 0imited

8 Na"i Finance @ In)est!ent P#i)ate Li!ite"

8I registered Jon anking !inance 4ompany

hresth !inancial B Insurance ervices +vt 0td 3e started in $&%D under the leadership

of 0ate hri Jirmal ang and has grown steadily and progressively since then. Eur clients as

well as usiness +artners have contributed tremendously to our growth we recogni/e and

applaud this, we value our relationship with them and for their convenience have all investing

avenues under one roof. It is a consistent profit making company from 0ast @ years. It9s an

e*tremely well capitali/ed company with high Jet worth (more than 5''' crore).

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SER0ICES

48 EUIT* AND DERI0ATI0ES:

Trading platform for equities and equity derivatives on J> and >1 the

4ompany has a reach of over $'' branches at D locations in the country to cater to retail

and high net worth individuals. The branches constitute of self owned hubs and franchise;

remissers; sub broker through whom the business is sourced.

68 COMMODITIES:

Trading platform for commodities on J42>K and "4K1 4ommodity trading

facility is provided to all the clients at all the centers and location. The company is

planning to establish itself as a leading research center for commodities market in the

country.

98 DISTRI.UTION

2istribution of retail finance products = "utual !unds and I+E9s. The group is

empanelled with all the !und ouses in the country to sell their "utual !und and J!E9s

using the retail network. I+E9s selling is undertaking from all the branches of the

company.

8 FINANCIAL AD0ISOR* SER0ICES:

Investment and trading advisory services to its clients based on technical,

fundamental and market research1 The 4ompany has one of the best fundamental

research and technical analysis teams in the company. 3e release reports based on

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The market share of the company in commodity and equity market in terms of turnover is

not significant.

O11o#tunities:

The growth of capital market is very high. Investors are now ready to invest their money

in this market because the return is much higher compare to other place for investment,

so they are ready to bear risk factor associated with it. It means volume will increase year

by year in this sector.

As Jirmal ang having its presence in D location of the country, so company has good

opportunities to e*tents its branches all over the country.

4ompany has not come yet with its own I+E, this is a good chance for the company to be

a public limited company which will help company to get money and create brand

awareness in this market.

Th#eats:

4ompany has to face a tough competition from maor market leaders, so it will be a

difficult task for Jirmal ang to sustain itself in this cut throat competitions.

8ecently financial market is not performing well due to global recession and investors

have suffered a huge loss, so investors now investing their money at much safer place

instead of this market.

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Co!!o"it Ma#>et in In"ia

A commodity may be defined as a product or material or any physical substance like food

grains, processed products and agro1based products, metals or currencies, which investors can

trade in the commodity market. Ene of the characteristics of a commodity is that its price is

determined as a function of its market as a whole. 3ell1established physical commodities are

actively traded in spot and derivative commodity market. 4ommodities actually offer immense

potential to become a separate asset class for market1savvy investors, arbitragers and speculators.

8etail investors, who claim to understand the equity market, may find commodity market

quite tricky. ut commodities are easy to understand as far as fundamentals of demand and

supply are concerned. 8etail investors should understand the risks and advantages of trading in

commodity market before taking a leap. istorically, prices of commodities have remained

e*tremely volatile. The gradual evolution of commodity market in India has been of great

significance for the countryMs economic prosperity. The commodity futures e*changes were

evolved in $%'' with the sole obective of meeting the demand of e*changeable contracts for

trading agricultural commodities. !or e*ample, the cotton e*change located at 4otton ?reen in

"umbai (then ombay) was the one of the first organi/ed commodity market in the country.

A commodity market is a market where various commodities and derivatives products are traded.

"ost commodity market across the world trade in agricultural products and other raw materials

(like wheat, barley, sugar, mai/e, cotton, cocoa, coffee, milk products, pork bellies, oil, metals,

etc.) and contracts based on them.

These contracts can include spot prices, forwards, futures and options on futures. Ether

sophisticated products may include interest rates, environmental instruments, swaps, or ocean

freight contracts. 4ommodities e*changes usually trade futures contracts on commodities, such

as trading contracts to receive a particular commodity in physical form. peculators and

investors also buy and sell the futures contracts at commodity e*changes to make a profit.

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The Indian commodity market offers a variety of products like rice, wheat, coal,

petroleum, kerosene, gasolineC metals like copper, gold, silver, aluminum and many more. There

are some commodities such as sugar, cocoa, and coffee, which is perishable, so cannot be

stocked for long time. These days, a wide range of agricultural products, energy products,

perishable commodities and metals can be sold under standardi/ed contracts on futures

e*changes prevailing across the globe.

4ommodities have gained importance with the development of commodity futures

inde*es along with the mobili/ation of more resources in the commodity market.

India has around -@ recogni/ed commodity future e*changes including three national1level

commodity e*changes. They are

$. Jational 4ommodity B 2erivatives >*change 0imited (J42>K)

-. "ulti 4ommodity >*change of India 0imited ("4K)

. Jational "ulti14ommodity >*change of India 0imited (J"4>) All these e*changes are

under the control of the !orward "arket 4ommission (!"4) of ?overnment of India.

Jational 4ommodity B 2erivatives >*change 0imited (J42>K) located in "umbai is a public

limited company incorporated on April -, -'' under the 4ompanies Act, $&@D and

commenced its operations on 2ecember $@, -''.This is the only commodity e*change in the

country promoted by national level institutions like I4I4I ank 0imited, 0ife Insurance

4orporation of India (0I4), Jational ank for Agriculture and 8ural 2evelopment (JAA82)

and Jational tock >*change of India 0imited ( J> India). It is a professionally managed

online multi1commodity e*change.

"ulti 4ommodity >*change of India 0imited ("4K) in "umbai is also an independent and de1

mutualised e*change recogni/ed by the ?overnment of India. This commodity e*change which

started operations in Jovember -'' has above 5' commodities on its platform and has a market

share of around %'H in the Indian commodity market. Ney shareholders of "4K are !inancial

http://www.nirmalbang.com/india-market/nse-stock-market-trading-india.aspxhttp://www.nirmalbang.com/india-market/nse-stock-market-trading-india.aspx


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Technologies (India) 0td., tate ank of India, :nion ank of India, 4orporation ank, ank of

India and 4anara ank. This commodity e*change facilitates online trading, clearing and

settlement operations for commodity futures market across the country.

Jational "ulti 4ommodity >*change of India 0imited (J"4>) is the first de1mutuali/ed,

>lectronic "ulti14ommodity >*change to be formed in India. En -@th uly, -''$, it was granted

approval by the ?overnment of India to organi/e trading in the edible oil comple*. It started

operating in the commodity market from Jovember -D, -''-. J"4> is the only >*change in

India to have investment and technical support from commodity relevant institutions like 4entral

3arehousing 4orporation 0td., ?uarat tate Agricultural "arketing oard, Jeptune Everseas

0td, Jational Agricultural 4ooperative "arketing !ederation of India (JA!>2), ?uarat Agro1

Industries 4orporation 0td. (?AI40), ?uarat tate Agricultural "arketing oard (?A") and

the Jational Institute of Agricultural "arketing (JIA").

As compared to other markets in the last ten years, commodity market has performed relatively

better than other markets like bonds, equity or currency. owever, the participation in future

trading in Indian commodity market is very low as compared to other countries as there is lack of

knowledge about this market to the investors and traders. It is not for mere trading purposeC

commodity trading is also used for hedge against inflation, price discovery of the commodity and

also as a sound investment.

Ni#!al .an, Secu#ities P)t5 Lt"5 > >I 8egn. Jo. IJ'$$'F-F@& ; > !JE 8egn.

Jo. IJ!'$$'F-F@& > 4urrency >I 8egn. Jo IJ>'$$'F-F@& J> 8egn. Jo.

IJ-'&&$& ; J> !JE 8egn. Jo. IJ!-'&&$& J> 4urrency >I 8egn. Jo

IJ>-'&&$& "4K1K 8egn. Jo. IJ>-D'&&$& Jirmal .an, Co!!o"ities P)t5 Lt"5

"4K "ember I2 $D@&' ; "4K !"4 8egn. Jo. "4K;T4";4E8+;'5&' J42>K "ember

I2 ''D- ; J42>K !"4 8egn. Jo. J42>K;T4";4E8+;''F@ J42>K +ET "ember I2

$''%5 I4>K membership I2 $$D@ ; I4>K 8egn. Jo. $$D@

5

http://www.nirmalbang.com/http://www.nirmalbang.com/


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Jirmal ang caters to the need of customers across India through a network of offices

encompassing almost every Indian state. Lou can locate branch near you...

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The clearing house has a number of members, who are mostly financial institutions

responsible for the clearing and settlement of commodities traded on the e*change.

The margin accounts for the clearing house members are adusted for gains and losses at

the end of each day (in the same way as the individual traders keep margin accounts with the

broker).

CLEARING .AN3S

J42>K has designed clearing bank through who funds to be paid and;or to be received

must be settled. >very clearing member is required to maintain and operate a clearing account

with any one of the designated clearing bank branches. The clearing account is to be used

e*clusively for clearing operations i.e., for settling funds and other obligations to J42>

including payments of margins and penal charges. A clearing member can deposit funds into this

account, but can withdraw funds from this account only in his self1name.

A clearing member having funds obligation to pay is required to have clear balance in his

clearing account on or before the stipulated pay1in day and the stipulated time. 4learing

members must authori/e their clearing bank to access their clearing account for debiting and

crediting their accounts as per the instructions of J42>K from time to time. The clearing bank

will debit;credit the clearing account of clearing members as per instructions received from

J42>K. The following banks have been designated as clearing banks I4I4I ank 0imited,

4anara ank, :TI ank 0imited and 2!4 ank 0imited, Jational ecurities 4learing

4orporation (J440) undertakes clearing of trades e*ecuted on the J42>K.

SETTLEMENT

!utures contracts have two types of settlements, the "T" settlement which happens on a

continuous basis at the end of each day, and the final settlement which happens on the last

trading day of the futures contract. En the J42>K, daily "T" settlement and final "T"

settlement in respect of admitted deal in futures contracts are cash settled by debiting;crediting

the clearing accounts of 4"s with the respective clearing bank.

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Daily Settlement Price

Handles daily price fuctuation

For all trades (mark to market)

Daily process at end o day

Final Settlement Price

Handles nal settlement o all

Open oppositions

Handles nal settlement o all

Open oppositions

On contract expiry date

All positions of a 4", brought forward, created during the day or closed out during the day,

are marked to market at the daily settlement price or the final settlement price at the close of

trading hours on a day.

$) Dail settle!ent 1#ice 2aily settlement price is the consensus closing price as

arrived after closing session of the relevant futures contract for the trading day.

owever, in the absence of trading for a contract during closing sessions, daily

settlement price is computed as per the methods prescribed by the e*change from

time to time.

-) Final settle!ent 1#ice: !inal settlement price is the closest price of the underlying

commodity on the last trading day of the futures contract. All open positions in a

futures contract cease to e*ist after its e*piration day.

SETTLEMENT MECHANISM

ettlement of commodity futures contracts is a little different from settlement of financial

futures, which are mostly cash settled. The possibility of physical settlement makes the process a

little more complicated.

O

DAIL* MAR3 TO MAR3ET SETTLEMENT:

%

Types of ettlement

!inal ettlement2aily ettlement


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2aily mark to market settlement is done till the date of the contract e*piry. This is done

to take care of daily price fluctuations for all trades. All the open positions of the members are

marked to market at the end of the day and profit;loss is determined as below

$) En the day of entering into the contract, it is the difference between the entry value

and daily settlement price for that day.

-) En any intervening days, when the member holds an open position, it is the different

between the daily settlement price for that day and the previous day#s settlement

price.

FINAL SETTLEMENT

En the date of e*piry, the final settlement price is the spot price on the e*piry day. Thespot prices are collected from members across the country through polling. The polled bid;ask

prices are bootstrapped and the mid of the two bootstrapped prices is taken as the final settlement

price. The responsibility of settlement is on a trading cum clearing member for all trades done

on his own account and his client#s trades. A professional clearing member is responsible for

settling all the participants# trades, which he has confirmed to the e*change.

En the e*piry date of a futures contract, members are required to submit delivery

information through delivery request window on the trader workstations provided by J42>K

for all open positions for a commodity for all constituents individually. J42>K on receipt of

such information matches the information and arrives at a delivery position for a member for a

commodity. A detailed report containing all matched and unmatched requests is provided to

members through the e*tranet.

+ursuant to regulations relating to submission of delivery information, failure to submit

delivery information for open positions attracts penal charges as stipulated by J42>K from time

to time. J42>K also adds all such open positions for a member, for which no delivery

information is submitted with final settlement obligations of the member concerned and settled

in cash.

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Jon1fulfillment of either the whole or part of the settlement obligations is treated as a

violation of the rules, bye1laws and regulations of J42>K, and attracts penal charges as

stipulated by J42> from time to time. In addition J42>K can withdraw any or all of the

membership rights of clearing member including the withdrawal of trading facilities of all

trading members clearing through such clearing members, without any notice. !urther, the

outstanding positions of such clearing member and;or trading members and;or constituents,

clearing and settling through such clearing member, may be closed out forthwith or any

thereafter by the e*change to the e*tent possible, by placing at the e*change, counter orders in

respect of the outstanding position of clearing member without any notice to the clearing

member and ; or trading member and ; or constituent.

J42>K can also initiate such other risk containment measures, as it deems appropriate

with respect to the open positions of the clearing members. It can also take additional measures

like imposing penalties, collecting appropriate deposits, invoking bank guarantees or fi*ed

deposit receipts, reali/ing money by disposing off the securities and e*ercising such other risk

containment measures as it deems fit or take further disciplinary action.

SETTLEMENT METHODS

ettlement of futures contracts on the J42>K can be done in three ways =by physical

delivery of the underlying asset, by closing out open positions and by cash settlement. 3e shall

look at each of these in some detail. En the J42>K all contracts settling in cash are settled on

the following day after the contract e*piry date. All contracts materiali/ing into deliveries are

settled in a period -1F days after e*piry. The e*act settlement day for each commodity is

specified by the e*change.

PH*SICAL DELI0ER* OF THE UNDERL*ING ASSET

!or open positions on the e*piry day of the contract, the buyer and the seller can

announce intentions for delivery. 2eliveries take place in the electronic form. All other positions

are settled in cash. 3hen a contract comes to settlement;the e*change provides alternatives like

delivery place, month and quality specifications.

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Trading period, delivery date etc. are all defined as per the settlement calendar. A

member is bound to provide delivery information. If he fails to give information, it is closed out

with penalty as decided by the e*change.

A member can choose an alternative mode of settlement by providing counter party

clearing member and constituent. The e*change is however not responsible for, nor guarantees

settlement of such deals. The settlement price is calculated and notified by the e*change. The

delivery place is very important for commodities with significant transportation costs. The

e*change also specifies the precise period (date and time) during which the delivery can be

made. !or many commodities, the delivery period may be an entire month. The party in the

short position (seller) gets the opportunity to make choices from these alternatives. The

e*change collects delivery information. The price paid is normally the most recent settlement

price (with a possible adustment for the quality of the asset and = the delivery location). Then

the e*change selects a party with an outstanding long position to accept delivery.

As mentioned above, after the trading hours on the e*piry date, based on the available

information, the matching for deliveries is done, firstly, on the basis of locations and then

randomly keeping in view factors such as available capacity of the vault;warehouse,

commodities already deposited and demateriali/ed and offered for delivery and any other factor

as may be specified by the e*change from time to time.

After completion of the matching process, clearing members are informed of the

deliverable;receivable positions and the unmatched positions. :nmatched positions have to be

settled in cash. The cash settlement is done only for the incremental gain;loss as determined on

the basis of the final settlement price.

Any buyer intending to take physicals has to put a request to his depository participant.

The 2+ uploads such requests to the specified depository who in turn forwards the same to the

registrar and transfer agent (8BT agent) concerned.

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After due verification of the authenticity, the 8BT agent forwards delivery details to the

warehouse which in turn arranges to release the commodities after due verification of the identity

of recipient. En a specified day, the buyer would go to the warehouse and pick up the physicals.

The seller intending to make delivery has to take the commodities to the designated

warehouse. These commodities have to be assayed by the e*change specified assayer. The

commodities have to meet the contract specifications with allowed variances.

If the commodities meet the specifications, the warehouse accepts them. 3arehouses

then ensure that the receipts get updated in the depository system giving a credit in the

depositor#s electronic account.

J42>K contracts provide a standardi/ed description for each commodity. The

description is provided in terms of quality parameters specific to the commodities. At the same

time, it is reali/ed that with commodities, there could be some amount of variances in

quality;weight etc., due to natural causes, which are beyond the control of any person. ence;

J42>K contracts also provide tolerance limits for variances. A delivery is treated as good

delivery and accepted if the delivery lies within the tolerance limits. owever, to allow for the

difference, the concept of premium and discount has been introduced. ?oods that come to the

authori/ed warehouse for delivery are tested and graded as per the prescribed parameters. The

premium and discount rates apply depending on the level of variation.

The price payable by the party taking delivery is then adusted as per the

premium;discount rates fi*ed by the e*change. This ensures that some amount of leeway is

provided for delivery, but at the same time, the buyer taking delivery does not face windfall

loss;gain due to the quantity;quality variation at the time of taking delivery. This, to some e*tent,

mitigates the difficulty in delivering and receiving e*act quality;quantity of commodity.

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CLOSING OUT .* OFFSETTING POSITIONS

"ost of the contracts are settled by closing out open positions. In closing out, the

opposite transaction is effected to close out the original futures position. A buy contract is closed

out by a sale and a sale contract is closed out by a buy. !or e*ample, an investor who took a long

position in two gold futures contracts on the anuary ', -''5 at D'&' can close his position by

selling two gold futures contracts on !ebruary -F, -''5 at 8s.@&-%.

In this case, over the period of holding the position he has suffered a loss of 8s.$D- per

unit. This loss would have been debited from his margin account over the holding period by way

of "T" at the end of each day, and finally at the price that he closes his position, that is 8s.

@&-% in this case.

CASH SETTLEMENT

4ontracts held till the last day of trading can be cash settled. 3hen a contract is settled in

cash, it is marked to the market at the end of the last trading day and all positions are declared

closed.

The settlement prince on the last trading day is set equal to the closing spot price of the

underlying asset ensuring the convergence of future prices and the spot prices. !or e*ample an

investor took a short position in five long staple cotton futures contracts on 2ecember $@ at 8s.

D&@'. En -'th !ebruary, the last trading day of the contract, the spot price of long staple cotton is

8s. DF-@. This is the settlement price for his contract. As a holder of a short position on cotton,

he does not have to actual deliver the underlying cotton but simply takes away the profit of 8s.

--@ per trading unit of cotton in the form of cash entities involved in physical settlement.

ENTITLES IN0OL0ED IN PH*SICAL SETTLEMENT

+hysical settlement of commodities involves the following three entities = an accredited

warehouse, registrar B transfer agent and an assayer. 3e will briefly look at the functions of

each accredited warehouse.

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ACCREDITED BAREHOUSE

J42>K specified accredited warehouses through which delivery of a specific

commodity can be affected and which will facilitate for storage of commodities. !or the services

provided by them, warehouses charge a fee that constitutes storage and other charges such as

insurance, assaying and handling charges or any other incidental charges following are the

functions of an accredited warehouse.

FOLLOBING ARE THE FUNCTIONS OF AN ACCREDITED BAREHOUSE

$) >armark separate storage area as specified for the purpose of storing commodities to

be delivered against deals made on the e*change. The warehouses are required to

meet the specifications prescribed by the e*change for storage of commodities.

>nsure and coordinate the grading of the commodities received at the warehouse before

they are stored.

-) tore commodities in line with their grade specifications and validity period and facilitate

maintenance of identity. En e*piry of such validity period of the grade for such

commodities, the warehouse has to segregate such commodities and store them in a

separate area so that the same are not mi*ed with commodities which are within the

validity period as per the grade certificate issued by the approved assayers. Approved

registrar and transfer agents (8BT agents).

The e*change specifies approved 8BT agents through whom commodities can be

demateriali/ed and who facilitate for demateriali/ation;re1materiali/ation of commodities in the

manner prescribed by the e*change from time to time. The 8BT agent performs the following

functions.

$) >stablishes connectivity with approved warehouses and supports them with physicalinfrastructure.

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) !urther processes the information, and ensures the credit of commodity holding to the

2emat account of the constituent.5) >nsures that the credit of commodities 1 only to the demat account of c@ the constituents

held with the e*change empanelled 2+s.

@) En receiving a request for re1materiali/ation (physical delivery) through the depository,arranges for issuance of authori/ation to the relevant warehouse for the delivery of

commodities.

8BT agents also maintain proper records of beneficiary position of constituents holding

demateriali/ed commodities in warehouses and in the depository for a period and also as on a

particular date. They are required to furnish the same to the e*change as and when demanded by

the e*change, 8BT agents also do the ob of co1coordinating with 2+s and warehouses for

billing of charges for services rendered on periodic intervals.

They also reconcile demateriali/ed commodities in the depository and physical

commodities at the warehouses on periodic basis and co1ordinate with all parties concerned for

the same settlement = entity interaction approved assayer.

4lient roker >*change

APPRO0ED ASSA*ER

5@

AJN 4learing 4orporation

2epository+articipant

J20

8BT

Agent3are

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The e*change specifies approved assayers through whom grading of commodities

(received at approved warehouses for delivery against deals made on the e*change), can, be

availed by the constituents of clearing members. Assayers perform the following functions.

Inspect the warehouses identified by the e*change on periodic basis to verify the

compliance of technical;safety parameters detailed in the warehousing accreditation norms of the

e*change. "ake available grading facilities to the constituents in respect of the specific

commodities traded on the e*change at specified warehouse.

The assayer ensures that the grading to be done (in a certificate format prescribed by the

e*change) in respect of specific commodity is as per the norms specified by the e*change in the

respective contract specifications.

?rading certificate so issued by the assayer specifies the grade as well as the validity

period up to which the commodities would retain the original grade, and the time up to which the

commodities are fit for trading subect to environment changes at the warehouses.

PRICING COMMODIT* FUTURES

The process of arriving at a figure at which a person buys and another sells a futurescontract for a specific e*piration date is called price discovery. In an active futures market, the

process of price discovery continues from the market#s opening until its close. The prices are

freely and competitively derived. !uture prices are therefore considered to be superior to be

administered prices or the prices that are determined privately. !urther, the low transaction costs

and frequent trading encourages wide participation in futures markets lessening the opportunity

for control by a few buyers and sellers.

3e try to understand the pricing of commodity futures contracts and look at how thefutures price is related to the spot price of the underlying asset. 3e study the cost1of1carry model

to understand the dynamics of pricing that constitute the estimation of fair value of futures the

cost of carry model.

REGULATOR* FRAMEBOR3 FOR COMMODIT* TRADING IN INDIA:

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At present there are three tiers of regulations of forward;futures trading system in India,

namely, government of India, !orward "arkets 4ommission (!"4) and commodity e*changes.

The need for regulation arises on account of the fact that the benefits of futures markets accrue in

competitive conditions.

+roper regulation is needed to create competitive conditions. In the absence of

regulation, unscrupulous participants could use these leveraged contracts for manipulating prices.

This could have undesirable influence on the spot prices, thereby affecting interests of society at

large. 8egulation is also needed to ensure that the market has appropriate risk management

system. In the absence of such a system, a maor default could create a chain reaction.

The resultant financial crisis in a futures market could create systematic risk. 8egulation

is also needed to ensure fairness and transparency in trading, clearing, settlement and

management of the e*change so as to protect and promote the interest of various stakeholders,

particularly non1member users of the market.

RULES GO0ERNING COMMODIT* DERI0ATI0ES ECHANGES

The trading of commodity derivatives on the J42>K is regulated by !orward "arkets

4ommission (!"4). :nder the !orward 4ontracts (8egulation) Act, $&@-, forward trading in

commodities notified under section $@ of the Act can be conducted only on the e*changes, which

are granted recognition by the central government (2epartment of 4onsumer Affairs, "inistry of

4onsumer Affairs, !ood and +ublic 2istribution). All the e*changes, which deal with forward

contracts, are required to obtain certificate of registration.

!orward "arkets 4ommission provides regulatory oversight in order to ensure financial

integrity (i.e. to prevent systematic risk of default by one maor operator or group of operators),

market integrity (i.e. to ensure that futures prices are truly aligned with the prospective demand

and supply conditions) and to protect and promote interest of customers ; nonmembers. It

prescribes the following regulatory measures

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$) 0imit on net open position as on close of the trading houses. ometimes limit is also

imposed on intra1day net open position. The limit is imposed operator1wise; and in some

cases, also member wise.

-) 4ircuit filters or limit on price fluctuations to allow cooling of market in the event of

abrupt upswing or downswing in prices.) pecial margin deposit to be collected on outstanding purchases or sales when price

moves up or down sharply above or below the previous day closing price. y making

further purchases;sales relatively costly, the price rise or fall is sobered down. This

measure is imposed only on the request of the e*change.

5) 4ircuit breakers or minimum;ma*imum prices. These are prescribed to prevent futures

prices from falling below as rising above not warranted by prospective supply and

demand factors. This measure is also imposed on the request of the e*change.

@) kipping trading in certain derivatives of the contract closing the market for a specified period and even closing out the contract. These e*treme are taken only in emergency

situations. esides these regulatory measures, the !.4) 8) Act provides that a client#s

position cannot be appropriated by the member of the e*change, e*cepted.

4onsent is taken The !"4 is persuading increasing number of e*changes to switch over

to electronic trading, clearing and settlement which is more customer;friendly. The !"4 has

also prescribed simultaneous reporting system for the e*changes following open outcry system.

These steps facilitate audit trail and make it difficult for the members to indulge in malpractice

like trading ahead of clients, etc.

The !"4 has also mandated all the e*changes following open outcry system to display at

a prominent place in e*change premises, the name, address, telephone number of the officer of

the commission who can be contacted for any grievance. The website of the commission also

has a provision for the customers to make complaint and send comments and suggestions to the

!"4. Efficers of the !"4 have been instructed to meet the members and clients on a random

basis, whenever they visit e*changes, to ascertain the situation on the ground, instead of merely

attending meetings of the board of directors and holding discussions with the office bearers.

RULES GO0ERNING INTERMEDIARIES

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In addition to the provisions of the !orward 4ontracts (8egulation) Act $&@- and rules

framed there under, e*changes are governed by its own rules and bye laws (approved by the

!"4). In this section we have brief look at the important regulations that govern J42>K. !or

the sake of convenience;these have been divided into two main divisions pertaining to trading

and clearing. The J42>K provides an automated trading facility in all the commodities

admitted for dealings on the spot market and derivative market. Trading on the e*change is

allowed only through approved workstation(s) located at locations for the office(s) of a trading

member as approved by the e*change. If 0AJ or any other way to other workstations at any

place connects an approved workstation of a trading "ember it shall require an approval of the

e*change.

>ach trading member is required to have a unique identification number which is

provided by the e*change and which will be used to log on (sign on) to the trading system. A

trading member has a non1e*clusive permission to use the trading system as provided by the

e*change in the ordinary course of business as trading member. e does not have any title rights

or interest whatsoever with respect to trading system;its facilities; software and the information

provided by the trading system. !or the purpose of accessing the trading system;the member will

install and use equipment and software as specified by the e*change at his own cost.

The e*change has the right to inspect equipment and software used for the purposes of

accessing the trading system at any time. The cost of the equipment and software supplied by

the e*change;installation and maintenance of the equipment is borne by the trading member and

users Trading members are entitled to appoint, (subect to such terms and conditions;as may be

specified by the relevant authority) from time to time Authori/ed persons and Approved users.

Trading members have to pass a petrifaction program;which has been prescribed by the

e*change. In case of trading members;other than individuals or sole proprietorships;such

certification program has to be passed by at least one of their

directors;employees;partners;members of governing body. >ach trading member is permitted to

appoint a certain number of approved users as notified from time to time by the e*change.

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The appointment of approved users is subect to the terms and conditions prescribed by

the e*change. >ach approved user is given a unique identification number through which he will

have access to the trading system. An approved user can access the trading system through a

password and can change the password from time to time.

The trading member or its approved users are required to maintain complete secrecy of its

password. Any trade or transaction done by use of password of any approved user of the trading

member, will be binding on such trading member. Approved user shall be required to change his

password at the end of the password e*piry period.

TRADING DA*S

The e*change operates on all days e*cept aturday and unday and on holidays that itdeclares from time to time. Ether than the regular trading hours, trading members are provided a

facility to place orders offline i.e. outside trading hours. These are stored by the system but get

traded only once the market opens for trading on the following working day.

The types of order books, trade books, price a limit, matching rules and other parameters

pertaining to each or all of these sessions are specified by the e*change to the members via its

circulars or notices issued from time to time.

"embers can place orders on the trading system during these sessions, within the

regulations prescribed by the e*change as per these bye laws, rules and regulations, from time to

time.

TRADING HOURS AND TRADING C*CLE

The e*change announces the normal trading hours;open period in advance from time to

time. In case necessary, the e*change can e*tend or reduce the trading hours by notifying themembers. Trading cycle for each commodity;derivative contract has a standard period, during

which it will be available for trading.

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CONTRACT EPIRATION

2erivatives contracts e*pire on a pre1determined date and time up to which the contract is

available for trading. This is notified by the e*change in advance. The contract e*piration

period will not e*ceed twelve months or as the e*change may specify from time to time.

TRADING PARAMETERS

The e*change from time to time specifies various trading parameters relating to the

trading system. >very trading member is required to specify the buy or sell orders as either an

open order or a close order for derivatives contracts. The e*change also prescribes different order

books that shall be maintained on the trading system and also specifies various conditions on the

order that will make it eligible to place it in those books. The e*change specifies the minimum

disclosed quantity for orders that will be allowed for each commodity;derivatives contract. It

also prescribed the number of days after which ?ood Till 4ancelled orders will be cancelled by

the system.

It specifies parameters like lot si/e in which orders can be placed, price steps in which

shall be entered on the trading system, position limits in respect of each commodity etc.

FAILURE OF TRADING MEM.ER TERMINAL

In the event of failure of trading member#s workstation and; or the loss of access to the

trading system, the e*change can at its discretion undertake to carry out on behalf of the trading

member the necessary functions which the trading member is eligible for. Enly requests made in

writing in a clear and precise manner by the trading member would be considered. The trading

member is accountable for the functions e*ecuted by the e*change on its behalf and has to

indemnity the e*change against any losses or costs incurred by the e*change.

TRADE OPERATIONS

Trading members have to ensure that appropriate confirmed order instructions are

obtained from the constituents before placement of an order on the system. They have to keep

relevant records or documents concerning the order and trading system order number and copies

of the order confirmation slip;modification slip must be made available to the constituents.

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The trading member has to disclose to the e*change at the time of order entry whether the

order is on his own account or on behalf of constituents and also specify orders for buy or sell as

open or close orders. Trading members are solely responsible for the accuracy of details of orders

entered into the trading system including orders entered on behalf of their constituents. Traders

generated on the system are irrevocable and blocked in one.

The e*change specifies from time to time the market types and the manner if any, in

which trade cancellation can be effected. 3here a trade cancellation is permitted and trading

member wishes to cancel a trade, it can be done only with the approval of the e*change.

MARGIN REUIREMENTS

ubect to the provisions as contained in the e*change bye1laws and such other

regulations as may be in force, every clearing member;in respect of the trades in which he is

party to, has to deposit a margin with e*change authorities.

The e*change prescribes from time to time the commodities;derivatives contracts, the

settlement periods and trade types for which margin would be attracted.

The e*change levies initial margin on derivatives contracts using the concept of


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The procedure for refund;adustment of margins is also specified by the e*change from

time to time. The e*change can impose upon any particular trading member or category of

trading member any special or other margin requirement.

En failure to deposit margin;s as required under this clause, the e*change;clearing house

can withdraw the trading facility of the trading member. After the pay1out, the clearing house

releases all margins.

CLEARING

As mentioned earlier, Jational ecurities 4learing 4orporation 0imited (J440)

undertakes clearing of trades e*ecuted on the J42>K, All deals e*ecuted on the >*change are

cleared and settled by the trading members on the settlement date by the trading membersthemselves as clearing members or through other professional clearing members in accordance

with these regulations;bye laws and rules of the e*change.

LAST DA* OF TRADING

0ast trading day for a derivative contract in any commodity is the date as specified in the

respective commodity contract. If the last trading day as specified in the respective commodity

contract is a holiday, the last trading day is taken to be the previous working day of e*change.

En the e*piry date of contracts, the tradi

gold and silver project

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